Is the investment market ‘en fuego’? No. Are there sparks and embers? Yes!

A mixed bag of catchphrases describes the current investment environment: bifurcated or trifurcated, trophy or trauma, extend and pretend. Each speaks to a market with inconsistency; disconnection between buyers and sellers, and lenders and borrowers; increasing distress but little acquisition; and continued debt scarcity despite improving credit conditions.

And do not forget that real estate exists in the greater economic context. Weak economic recovery, persistently high unemployment and a lack of job creation will continue to impact real estate fundamentals for at least the next 12 to 24 months.

However, most folks would agree that we’re coming out of 36 months of deep recession, and the commercial real estate investment market, though it lags the economy by about six months, feels different than in early 2010. Momentum is building slowly, broker and investor “buzz” is more positive, corporations have stockpiled cash and institutional investors need to use money allocated for real estate investment.

Following is a look at recent trends, and how success can be achieved in this rapidly evolving environment.

In 2010 we saw a total of $754.1 million in transactions ($500,000 and larger) in the tri-county area. This number, although only 24 percent of the total volume of 2007, is still encouraging because it represents a 19 percent increase over 2009. Last year also saw a rise in the number of transactions greater than $10 million, and all product types were represented in this category – another promising sign.

Rent trends seem to have reversed course – rates are leveling off and perhaps even rising. Vacancy rates are dropping slightly and absorption is rising slowly – however, this is as much a function of no new construction as it is of few new companies leasing up more space. Cap rates are dropping again, but not precipitously, and most of the movement is for trophy properties. Interest rates are still very attractive.

All in all, it appears the market correction has started, but it will take a while to turn the ship – which is actually a good thing. Significant volatility tends to breed uncertainty and uncertainty tamps down real estate investment activity.

Portland remains a secondary market with few trophy properties changing hands on a regular basis. All eyes will be on the potential sales of MachineWorks and First & Main (how much will the empty ground-floor retail space and the preponderance of government leases impact the final result?). When these sales close, will more buyers come off the sidelines? More sellers may place their properties on the market once we see cap rates and per-square-foot pricing for these deals.

More distressed product will finally come to market – two or three years is a long time for owners to feed a bleeding property, particularly with the risk that one non-performer can drag down a portfolio of other well-performing investments. Banks will also start divesting themselves of their foreclosed properties – they’ve taken a lot of write-downs, and now it’s time to get these assets off their books.

Lenders will open the purse strings again – but be prepared! LTVs will still be in the low to mid 60s; debt service coverage ratios will need to be 1.25 or higher; vacancy will be underwritten at 7 percent or greater; and there may be reserve requirements for significant lease events.

The challenge in Portland is that it is a “tweener” market – a small amount of trophy stock and not much in the way of fire sales. We’re left with a large middle ground – properties that have decent locations and fairly strong rent rolls. So, how does one sell these kinds of properties?

First, understand the motivations of the seller or buyer. What do they want to accomplish? Are their goals long-term or short-term? How long is the timeframe to complete the deal? Do they understand the investment market or do they need to be educated so they have realistic expectations? Success comes only after a client’s definition of success is pinpointed.

Second, remember that better data means a better deal. Think of every possible question a buyer or lender might ask about the property being brought to market, and dig deep to find answers ahead of time. Communicate thoroughly with the seller – vital pieces of information should not trickle into the picture throughout the sale process. Perform due diligence up front.

Third, excel in negotiations. It is absolutely possible to have every negotiation end in a win-win situation – just work to win your client a little bit more than the other side! Utilize technology to increase responsiveness, but never underestimate the power of face-to-face communication to create relationships. It creates trust, which gets deals done.

It will get better in 2011, but be patient. It took a long time for us to arrive at the cliff in mid 2007. At least 24 months will be needed to approach 2007′s level of investment activity.

And take note – a looming issue on the horizon could significantly impact the real estate investment market. The coming changes in lease accounting could steer companies in the direction of shorter term leases in order to mitigate the impact on their balance sheets. And to lenders and investors, shorter terms leases potentially mean more downtime, more commissions, more tenant improvements and more risk.

What will that mean for how real estate investments are valued in the future? Stay tuned!

Vice President MaryKay West specializes in investment sales at NAI Norris, Beggs & Simpson, a real estate brokerage and asset/property management company. Contact her at 503-223-7181, or mwest@nai-nbs.com.